Lenders create payment schedules so debt is can be broken down into a series of minor payments for borrowers. This serves several purposes. On one hand, it makes it easier for a borrower to repay the loan, especially when dealing with large loans such as mortgages. On the other hand, the more payments the borrower makes, the more times the interest rate applies to the loan, which means the lender can make more profit. A debt redemption can affect this relationship in a number of ways.
Definition
Debt redemption typically refers to the full payment of the debt and the closing of a debt account. When a lender has to take a debt as a loss it is referred to as debt forgiveness or cancelling. But a redemption signifies that the debtor has redeemed the claim the lender had, removing any obligation and fully ending the debt. The lender responds by marking the account as fully paid, which can have positive effects on a borrower's credit rating.
Organizational Debt Redemption
Debt redemption has special meaning for organizations that issue their own debt to raise money. An organization typically issues debt through bonds, which act as loans when investors purchase them, lending funds to the organization. In this case, debt redemption is conducted according to a specific schedule determined by the date the company issued the debt and the length of maturity for the bond. This creates a debt obligation for the entire series of bonds at a specific date in the future, for which the organization must prepare accordingly.
Bankruptcy Options
For individuals, common debt redemption occurs as they follow the payment schedule created by the lender. But debt redemption is also an important strategy for borrowers considering bankruptcy. In bankruptcy, there typically are three options for every type of debt before cancellation. The first option allows borrowers to give lenders collateral on secured loans in exchange for removing the obligation. The second option allows the borrower to continue making some type of payment to the lender without discharging the debt. The third option is referred to as redemption, in which borrowers agree to pay off the entire loan in a one sum to end the account.
Benefits
Debt redemption can be an easy way for borrowers to take care of debts when working through a bankruptcy. Because full payment sums are required, this is a common tactic only for small debts, including debts used to buy personal possessions such as furniture, which can easily be paid off. If borrowers struggle to redeem these small debts, they may take out a consolidation loan to redeem many similar debts at the same time.
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